New Retirees Need 3.9% Safe Withdrawal Rate

Key Quotes

"We use what we call a base case that we latch onto when we do this research. So we're assuming that someone wants a paycheck equivalent in retirement, and the idea is to see if someone is starting out with a portfolio, how much they could initially withdraw from that portfolio and then just inflation-adjust that dollar amount thereafter. We've been doing this research, as you said, Robert, since 2021, and in 2025, when we did the research, we're using our team's forward-looking estimates for stock and bond returns and inflation, and we came up with a 3.9% starting safe withdrawal rate for new retirees."

Christine Benz explains that Morningstar's base case for safe withdrawal rates assumes a retiree desires a paycheck equivalent and aims to determine the initial withdrawal from a portfolio, adjusted for inflation annually. Benz highlights that their 2025 research, using forward-looking estimates, resulted in a conservative 3.9% starting safe withdrawal rate for new retirees.

"It does, not necessarily over the next 30 years, but certainly over the next decade, given the strong run-up that we've had in US equities, especially. Our return assumptions are reduced over that whole 30-year time horizon because we think that the next 10 years probably won't be that great, largely because of high valuations. I would also point out that the overvaluation that we see isn't equally spread across the style box, that it's mainly in that large-cap growth component of the style box. But nonetheless, we think that the next 10 years, investors should be prepared for potentially some rough sledding in equities."

Christine Benz indicates that Morningstar's reduced return assumptions for the next decade are due to high valuations, particularly in large-cap growth stocks. Benz advises investors to anticipate a challenging period for equities in the coming ten years, though the overall 30-year outlook is expected to be more typical.

"So one is being able to rein in your spending if you possibly can. So if we have really calamitous market losses, your portfolio loses a lot of value, if you can spend less during those periods, that's certainly a best practice for retirement spending. And the other point I would make is build yourself a runway of safer assets that you could spend through if you needed to, so you wouldn't have to touch your depreciated equity assets."

Christine Benz identifies two key strategies to mitigate sequence of return risk in retirement. Benz suggests that reducing spending during periods of significant market losses is a prudent practice. Additionally, Benz recommends maintaining a reserve of safer assets to draw from, thereby avoiding the need to sell depreciated equity holdings.

"So my hope is that people do explore some of these flexible strategies because they're the best way to lift your lifetime withdrawals from your portfolio."

Christine Benz expresses a desire for individuals to consider flexible withdrawal strategies, arguing that they are the most effective method for increasing the total amount withdrawn from an investment portfolio over a lifetime. Benz suggests that rigid withdrawal plans may lead to underspending and missed opportunities for lifetime enjoyment or charitable giving.

"So if you can figure out a way to have Social Security, maybe plus some other income, whether working income or an annuity or something like that, if you can get those items to align, that makes the portfolio spending discussion a whole lot easier."

Christine Benz proposes that aligning fixed income sources, such as Social Security, pensions, or annuities, with essential fixed expenses simplifies the process of determining portfolio spending. Benz explains that this alignment reduces the reliance on investment portfolio withdrawals to cover core living costs.